SaaS Multiples are back above 6x

08/16/2016By Sammy Abdullah, CFA

Every quarter we track the revenue multiples of publicly traded SaaS companies to get a sense of where valuations are and where they’re trending. Q2 2016 proved to be a strong one for SaaS valuations, as revenue multiples on 45 publicly traded companies hit a median and average of 6.14x and 6.15x respectively. As importantly, it marked the third straight quarter of increasing SaaS valuations (in Q4 2015, the median was only 4.41x). While we’re still a ways away from the peak shown below (7.50x in Q4 2014), overall valuations are moving in the right direction if you’re a SaaS entrepreneur. A table of the data is below.

So why are SaaS multiples increasing? In our view, the improving multiples are due mostly to a rise in the overall market: The S&P 500, NASDAQ, and DOW are at all-time highs as I write this. While the appetite for tech investing seems healthy, rising multiples are more a function of macro factors (rock bottom interest rates, attractive US market relative to foreign markets, crashing Pound, weak Europe, unattractive yields, etc) than a desire by investors to weight tech more heavily than other sectors in their portfolio, as they did in the late 90’s.

So what’s this mean for entrepreneurs? Even though the rise in multiples isn’t necessarily due to a desire by investors to overweight tech in their portfolios, it’s still good news if you’re raising money or selling your business. So long as these trends continue for a few quarters, at some point entrepreneurs will be able to justify higher valuations when they’re raising money or selling their business. So while you shouldn’t expect to justify higher multiples immediately, as they say, the trend is your friend.